Voices [0:00]

A foolish consistency is the hubgoblin of little mind, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Welcome And Listener Focus

Mostly Queen Mary [0:18]

And now, coming to you from Dead Center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Yes, it is still in my memory, thanks. We have also created an additional resource, a collection of additional foundational episodes and other popular episodes.

Voices [1:07]

We have top men working on it right now.

Mostly Uncle Frank [1:14]

Top men. And you can find those on the episode guide page at www.riskparody radio.com. Inconceivable. All thanks to our friend Luke, our volunteer in Quebec. Sacosh. We'd be helpless without him.

Voices [1:36]

I have always depended on the kindness of strangers.

Mostly Uncle Frank [1:41]

Because other than him, it's just me and Marion here. I'll give you the moon, all right?

Voices [1:46]

I'll take it.

Mostly Uncle Frank [1:48]

We have no sponsors, we have no guests, and we have no expansion plans.

Voices [1:53]

I don't think I'd like another job.

Mostly Uncle Frank [1:55]

Over the years, our podcast has become very audience focused. And I must say, we do have the finest podcast audience available.

Voices [2:03]

Top drawer. Really top drawer.

Mostly Uncle Frank [2:07]

Along with a host named after a hot dog.

Voices [2:10]

Light in the Francis.

Mostly Uncle Frank [2:14]

But now onward, episode 507. Today on Risk Party Radio, we're just gonna do we do best here, which is attend to your emails.

Voices [2:24]

I could have told you that.

Mostly Uncle Frank [2:26]

But before we get to that, we have some news about our fundraiser for Fairfax Casa that we've been running in March and April. We wanted to update you on the results. But since this is Mary's domain, we'll let Mary do that. Which means we need to proceed with a Queen Mary segment here. I can just find the appropriate music.

Voices [3:33]

Listen to the story now.

Mostly Queen Mary [3:36]

There are moments that transcend the numbers on the screen or the percentages in a portfolio. And this is one of them. It is with tremendous gratitude that I share our final update. Together, this community has raised $30,035.34 for Fairfax Casa. Together with the matching challenge of $20,000 provided by our generous benefactor, Matthew 6.3, we have raised over $50,000 for Fairfax Casa. When we started this campaign, it was a hope, a what-if shared over the airwaves. You responded with a level of kindness and conviction that has been moving to witness. In our usual discussions, we focus on protecting our futures. But through your donations, you've chosen to protect the future of children who are navigating some of the hardest chapters of their lives. You are the constant in a child's volatile world, providing them with a dedicated advocate. You are the bridge to a safe, permanent, and loving home. And you are the proof that when people come together with a shared purpose, the impact is exponential. It is a privilege to spend time with our audience every week, but it is an even greater honor to see the character of this audience in action. You didn't just listen, you stepped up. You've shown that the Risk Parity Radio community is built on a foundation of deep empathy and a desire to leave the world better than we found it. Whether you gave a little or a lot, please know that your contribution is changing a child's life story. Thank you for spending the past few months with me on my end of the beach where the littlest starfish are found.

Voices [5:23]

So shine is a good deed in a weary world.

Mostly Uncle Frank [5:29]

So thank you for all you do as listeners here and donators, and thank you for making my wife happy. I am a very lucky man indeed. But you still will go to the front of the email line if you donate to either the Father McKenna Center or Fairfax Casa. So make sure you mention that in your email. In fact, all of the emailers today are donators to Fairfax Casa.

Voices [6:22]

The best, Jerry, the best.

Mostly Uncle Frank [6:24]

And we thank you again for your support. But now without further ado.

Voices [6:29]

Here I go once again with the email.

Estimating Retirement Health Care Costs

Mostly Uncle Frank [6:32]

And first off. First off, we have an email from Zach.

Voices [6:39]

If I were to offer a remedy to the human condition, it would be a garden. Or acid. And Zach writes.

Mostly Queen Mary [6:49]

Hi Mary and Frank. Thanks for all the wonderful content and highlighting yet another phenomenal cause. Hopefully, this donation to Fairfax Casa beats the buzzer on your campaign.

Voices [7:00]

Yes!

Mostly Queen Mary [7:01]

My question is related to guessing health care expenses in retirement. I'm about to turn 40 and have at least 15 working years to go before retirement, God willing. I currently track my expenses and adjust them with an inflation factor to guess at what my retirement spending may be. The crystal ball can help you. It can guide you. I also apply other factors to each spend category, assuming more for some and zeroing out others, like saving for kids' college and retirement.

Voices [7:32]

Donate to the children's fund? Why? What have children ever done for me?

Mostly Queen Mary [7:37]

The biggest variable seems to be health care costs, as I have no idea how to even start to model that. My current health expenses are fairly low, but I know that will change as I get older. Are there any good resources or frameworks you know of to provide a crystal ballpark estimate of what your medical expenses might look like down the road?

Voices [7:57]

It's kind of looking at the aura around the ball, see the movement of energy around the outside of the ball.

Mostly Queen Mary [8:03]

My goal is to fund this future expense from my HSA, and having enough in my HSA will be a small variable as when to pull the retirement trigger. I'm still working through about 250 episodes, so feel free to point me to those if you've already tackled this. Thanks again, and please let me know if you two make it to the Denver area so I can provide some mostly cold beer served in cans. Zach.

Voices [8:28]

There are those who will say that the economy has forsaken us. Nay, you have forsaken the economy! And now you know the economy's wrath. Oh, thou can shop in a sporting goods store, but knowest thou that the economy will take away thy Broncos cap from thine head.

Mostly Uncle Frank [8:46]

Well, Zach, thank you for being a donor to Fairfax Casa. And yes, your donation was included in those totals that Mary mentioned.

Voices [8:56]

That is the straight stuff, oh funk master.

Mostly Uncle Frank [8:59]

I think this is a very interesting question. It's a valuation question or estimation question. And whenever I see these kinds of questions, my first instinct is to think about well, how would an insurance company do this or actuaries do this? Because they're in the business of doing this.

Voices [9:17]

Do you have life insurance, Phil? Because if you do, you could always use a little more, right? I mean, who couldn't?

Mostly Uncle Frank [9:24]

And have some of the best methods for doing these sorts of things. And this sort of estimation reminds me of the way that term life insurance is priced.

Voices [9:36]

Shirley, you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [9:40]

If you think about term life insurance, say for a 20-year term or a 30-year term, the idea of that to make it more palatable to the customer is to even out the term premiums over time. So it's the same term premium year after year. But if you bought that thing year on year and paid the new premium, obviously the premium would keep going up as you got older. Similarly, you have the same issue with respect to healthcare insurance that your ACA price for healthcare insurance on the marketplace, that's what I'm assuming we're talking about here, is different depending on how old you are. So what you're really trying to do is estimate what would be kind of a flat equivalent of a term premium that would pay for this healthcare insurance over the next, I guess, 25 years in your case. So it's possible to do this, it's going to take a little work. Basically, what you need to do is find out how much it would cost for you at 40, but also for each of a 41-year-old, a 42-year-old, a 43-year-old, a 44-year-old, for each of those people going up to age 65, you want to know what is today's price for that person. So you have everything in today's dollars. And if you wanted to cheat at it, you would simply do it as today's dollars, and then what would it be for a 64-year-old person? Now I'm assuming for the purpose of this that there are no subsidies whatsoever because it's easier to calculate. Once you start adding in subsidies and trying to estimate when you would get them, it becomes a much more difficult problem. I think you should do the easy problem first and then see if you modify it. Obviously, it's sort of the maximum you would pay is the no subsidy price. You may need to use AI to do this because the other way I'm thinking of doing it is going into your ACA marketplace and then changing your birth date over and over again to simulate being a year older to you get all these prices and then you can put them all on a spreadsheet. Once you have those, you can estimate or get an average of what the price would be and think of that as a term premium for the next 25 years. So that gives you a price in today's dollars. Then what you would do is take that price and add whatever inflation measurement you're doing to that term price, if you will. And it's gonna be somewhere as if you were, say, a 52-year-old or something like that. So that would be a really good way of estimating this because it's based on actual data and you're not having to guess or use somebody's crystal ball.

Voices [12:13]

My name's Sonia. I'm gonna be showing you um the crystal ball and how to use it or how I use it.

Mostly Uncle Frank [12:20]

Because most of the crystal balls you'll find online about this kind of topic are pretty bad. They're usually designed to scare people or have some kind of political bent to them.

Voices [12:31]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [12:38]

So then the question becomes what inflation factor should you use for this? And there are two ways to do it. I think most advisors do this the wrong way, honestly. Because you can either use an aggregate inflation measurement for all of the expenses together, or you need to break them all down into their specific categories. And there is research from JP Morgan doing this for retirees, essentially. What you learn from that research is that every other category besides healthcare, the retiree experiences inflation at less than the CPI. What I see often, and is an obvious error in forecasting, is to apply a base rate inflation that's supposed to be global inflation to everything but healthcare, but then adding a bonus to the healthcare side of it. That is overcounting inflation by definition.

Voices [13:32]

Everyone in this room is now dumber for having listened to it.

Mostly Uncle Frank [13:37]

So you either need to just use the one rate for all of your expenses collectively or break it down into all of the specific ones because all the other ones should be lower than your average inflation rate.

Voices [13:50]

You are correct, sir. Yes!

Mostly Uncle Frank [13:53]

I'll see if I can find that little JP Morgan thing and link to it. That's one of the things that tells us that inflation for retirees is about 1 to 2% less than the CPI. And it was done on tens of thousands of people. So I know this sounds like a tedious task, but it is a good way to use actual data from today to get a reasonable estimate. And I would be pretty confident in what that estimate is. At least as confident as I would for any other kind of expense projection. So thank you for being a donor to Fairfax Casa. Hopefully this helps. Write back if it doesn't or it doesn't make sense. And thank you for your email.

Voices [14:43]

Second off.

Mostly Uncle Frank [14:45]

Second off, we have an email from Brian. Hey Brian, care to place a wager? And Brian writes.

Mostly Queen Mary [14:52]

Hi, Frank. Thanks for answering my previous email. I made a donation to Fairfax Casa. It's been very interesting to learn about this special service. Question. My buddy and I were discussing index funds, and he was questioning whether index funds will remain the best vehicle for future investing.

Voices [15:10]

Real wrath of God type stuff. Exactly.

Mostly Queen Mary [15:13]

I have to admit, it once came across my mind that as everyone piles into index fund investing, does that mean the best times are over? Fire and brimstone coming down from the skies. I worked in technology for 30 plus years, so it's not uncommon to see when the masses start doing something, it can mean it's on the way out. And it's gone. I would love to hear your thoughts. Brian. P.S. I know we can't see the future even with a crystal ball.

Voices [15:46]

Rivers and seas boiling. Human sacrifice, dogs and cats living together, mass hysteria.

Mostly Uncle Frank [15:57]

Well, first, thank you for being a donor to Fairfax Casa. And now you're writing me about index funds. Do the chickens have large talons? Do they have what? Large talons? I don't understand a word you just said. I actually hate this definition because it's used and misused in many ways. And half the time when people say index fund, they either don't know what they're talking about or they're talking about something that is different from what I would consider an index fund. The short answer to your question is yes, they're still going to be useful.

Voices [16:30]

That's the fact jack! That's the fact, Jack!

Mostly Uncle Frank [16:34]

But they're not the only tool.

Voices [16:36]

And we have the tools, we have the talent.

Mostly Uncle Frank [16:39]

But let's first talk about this sorry history of the term index funds. It was originally used in the industry to distinguish a managed mutual fund from a mutual fund based on an index. So this was the big battle being fought in the first decade of this century about whether these index funds like VTSAX that were following a total market index or I guess it was VFIAX was the mutual fund that followed the S P 500 from Vanguard, and whether those were a better choice than managed funds, because managed funds did dominate the world of funds up until that time. And particularly if you go back to the 1990s, there was no question that everybody was looking to use a managed fund and find the next Peter Lynch who was going to manage this thing into wealth and glory.

Voices [17:32]

Hello, Mrs. Farnickel, how are you today? Making a deposit, are we? Great. We can just put that into your retirement account and make it go to work for you and it's gone.

Mostly Uncle Frank [17:42]

Okay, so that definition was okay, but then it got very confused when people started coming out with ETF versions of the same funds. Because people started saying index fund when they meant the mutual fund version of it, but then they would call the ETF version an ETF, like it was something different, when in fact it was the exact same thing. So the proper use should have been an index fund either in mutual fund form or in ETF form. Because the difference is between index funds and managed funds, not between index funds and ETFs, and that misuse or distinction always has driven me crazy, but it's still used by many in the industry today. Which gets to the next confusion. There are many people who think that an index fund has to be based on one of the very popular indexes, like the SP 500, or something that is large cap weighted, that arranges the fund based on the capitalization in the fund. So they would say if you're investing only in tech stocks like XLK, that is cap weighted. They buy more of the largest companies and less of the smaller companies. And lots and lots of funds are organized that way, and that is one way to organize an index. That is not the only way to organize an index.

Voices [18:59]

That's not how it works. That's not how any of this works.

Mostly Uncle Frank [19:03]

In fact, there are more indexes now that exist in the world than there are stocks and funds. And anyone can make one up. Because all an index is, is a list for an algorithm. And all an index fund is actually doing, and I would call them this, I wouldn't call them index funds, I would call them algorithmic funds, with the idea that they are following some algorithm which sorts them as opposed to having humans pick them. And to me, that definition makes a whole lot more sense than trying to call things index funds and then distinguishing between which kinds are based on popular indexes and which ones are based on proprietary indexes. For instance, funds like AVUV or the other Avantis or DFA funds, those are algorithmic funds. They are based on a sorting mechanism, but it's proprietary to those providers. So although it's run exactly like an index, in technical terms, they're classified as managed funds, even though there's no human sitting down picking the stocks in there.

Voices [20:04]

George, we've got a problem. There's a memo here from accounting telling me there's no such thing as the human fund.

Mostly Uncle Frank [20:15]

Well, there could be. And are they getting too concentrated, which could lead to some kind of bubble or crash or whatever you want to call it?

Voices [21:13]

Uh what?

Mostly Uncle Frank [21:14]

It's gone. It's all gone. And my answer is, well, that could be a problem if you're not paying attention and you're not trying to diversify away from strictly large cap stocks. So there is more risk in just holding one of those as opposed to holding that and say a small cap value fund together. But that doesn't mean they're gonna go away. I would suspect what's going to happen is what usually happens. Something becomes popular, it becomes very popular, then there's some kind of dislocation or market crash which causes it to underperform and people start doing other things. And in this case, people will diversify and not just be putting their money into these large cap index funds. My answer to that is well, we can do that right now, so we don't need to wait. I actually heard an excellent discussion about a lot of these. Concepts this morning. It was on bigger pockets of money. They had Ben Felix on from Rational Reminder. He was talking about factor investing and how all these things work and how they're constructed. I will link to that in the show notes. I think that is a good thing to listen to because it clarifies why you probably want to have something other than just large cap-weighted funds in your portfolio. Although it probably doesn't matter that much if you're just accumulating. Because you don't really don't care about the volatility as much. Don't don't care? It's a problem of motivation, alright? I wouldn't say the best times are over. History doesn't repeat, but it rhymes. So there will be periods where the large cap funds will outperform other kinds of funds. And then there'll be periods where smaller companies and value companies and other kinds of companies will outperform the large caps. And which one will do better in the next period is pretty unpredictable. So if you don't want to think about it, hold more than one fund. And that is really what's going on when you look at all of Paul Merriman's different kinds of portfolios. He's trying to mix up the factors in the funds to get a better outcome. But there's no reason to panic.

Voices [23:14]

Human sacrifice, dogs and cats living together, mass hysteria.

Mostly Uncle Frank [23:18]

So I wouldn't be doing that either.

Voices [23:20]

You can't handle the dogs and cats living together.

Mostly Uncle Frank [23:24]

I would pay attention whenever you hear somebody talking about this to try and figure out exactly what they mean when they say index fund. Any discussion about quote index funds, unquote, that I hear needs to be parsed out to figure out exactly what they're talking about, because oftentimes people are talking about different things than you might expect. Anyway, thank you for being a donor to Fairfax Casa. Hopefully that helps. Actually, go listen to Ben Felix, that'll probably help more. And thank you for your email.

Voices [23:53]

So, Brian, we're even now, right? Ready to start a new life in England. I've got my money. Your wounds have healed up nicely. What do you say we let bygones be bygones, hmm? You shot me in both my knees, then lit me on fire.

Mostly Uncle Frank [24:06]

Next off, we have an email from Holly.

Voices [24:09]

I drink your milkshake. I drink it out every day. I drink it up. I drink it up.

Mostly Uncle Frank [24:22]

And Holly writes.

Mostly Queen Mary [24:24]

He drinks it up. Love your work. Thank you.

Voices [24:30]

Drink, drink, drink, drink. Your milkshake shake.

Mostly Uncle Frank [24:36]

Well, Holly sent me a link to yet another milkshake meme. Can't get enough of those, I suppose. And if you don't listen to this podcast that much, all this stuff might be confusing. But we essentially use certain sound clips as a kind of light motif when we're talking about particular topics.

Voices [25:05]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [25:10]

So when somebody's talking about trying to predict the future or using some model to predict the future as opposed to historical data, we often get out Sonia and her crystal balls.

Voices [25:20]

As you can see, I've got several here. Um, a really big one here, which is huge. This is the one that I tend to use more often. I have a cow site ball and I have a black obsidian one here.

Mostly Uncle Frank [25:38]

When we talk about small cap value funds and stocks, we often ask Christopher Walken for his opinion.

Voices [25:44]

Guess what? I got a fever, and the only prescription is more cowbell.

Mostly Uncle Frank [25:52]

And when we talk about the AUM business model, where the advisor takes money out of your portfolio automatically on a periodic basis, we do refer to There Will Be Blood, Daniel Plainview, and Milkshake drinking. Because it seems so apropos.

Voices [26:14]

And I have a milkshake, and I have a straw, there it is. That's a straw, you see. Watching. And starts to drink your milkshake. I drink your milkshake. I drink it up.

Mostly Uncle Frank [26:42]

And for whatever reason, that is one of the most popular memes, even amongst our listeners' children, believe it or not.

Voices [26:52]

Every day I drink it up! Stop trying!

Mostly Uncle Frank [27:01]

You should also be aware that many of our listeners write their emails specifically to elicit a certain sound clip, or more than one sound clip. Or to try to get Mary to laugh and make fun of me. But that's all part of what goes on in our little dive bar here.

Voices [27:31]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to him, exactly.

Mostly Uncle Frank [27:39]

And we appreciate your participation.

Voices [27:41]

You're not going to amount to jack squads! You're gonna end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [27:54]

So thank you for being one of our donors on Patreon, which has moved you to the front of the email line and has gone to Fairfax Casa as terms of a donation. Thank you for your link and thank you for your email.

Portfolio Moves For Stagflation

Voices [28:33]

Last off last off?

Mostly Uncle Frank [28:36]

We have an email from Optimus Bill.

Voices [28:39]

Oh I don't know you were doing one.

Mostly Uncle Frank [28:42]

And Optimus Bill writes.

Mostly Queen Mary [28:45]

Dear Queen Mary and Uncle Frank, risk parity portfolios seem to suffer most in stagflation, flat or decreasing growth with sustained or increasing inflation. They seem to lean predominantly on gold and manage futures in this environment as equities and long-term treasuries generally suffer. Short-term bonds and cash seem to be risk mitigators in this market weather, but are in short supply in risk parity portfolios, except for maybe the golden butterfly. This type of market can remain irrational longer than we can remain solvent with typically small allocations to short-term cash equivalents in our portfolios. 2022 gave us all a taste of these conditions. But it pales in comparison to the early 70s. I did not experience the 70s, so I fear them a little, and we are in the midst of a fluctuating oil supply shock and spiking energy prices, and Sonia is on vacation.

Voices [29:49]

Excuse me while I change, the hollow boogie has made me shwatky. Yeah, shwaty.

Mostly Queen Mary [29:55]

The questions: What portfolios and assets in what allocation are best at helping weather stagflation? You use direct indexing in property and casualty insurance companies, a la Warren Buffett, to mitigate risk in this environment and not KBWP. Do we need a better asset class slash ETF with more of a concentration in the best PC performers? Does a margin loan backup plan help to avoid selling depreciating assets? What other assets might help in these conditions? Do we need a concentrated sector bet in energy slash utilities? Does this quadrant simply need expense adjustments slash spending cuts and discipline to weather the storm? Thanks for any general insights that you can provide regarding portfolio construction and management tactics in a stagflation environment. That's what I'm talking about. Optimus Mr. Bill.

Mostly Uncle Frank [31:00]

Ah, stagflation. Now there's a bug of bear. So going through your questions, what portfolios and assets are best helping weather stagflation? Well, generally the best one is going to be managed futures, and for two reasons. If there is increasing inflation, that's usually picked up by commodities. And if you get a trend in commodities, like we're having in oil right now, a managed futures fund will pick that up. And so managed futures funds in 2022, last time we had stagflation, we're up 20 or 30 percent. And so that may be all the insurance you need right there. Those also pick up on an interesting thing because when there is stagflation in the economy, you can almost guarantee now there's going to be some kind of substantial reaction from the Federal Reserve or other parts of the government. And that's also what happened in 2022, that the interest rates were raised substantially in a trend. And a managed futures fund also picks up on the trend in interest rates and profits from that. So basically, it's tracking the government response to these sorts of things. And the reason I would expect that to happen again is because everybody remembers Paul Volcker solving the stagflation of the 1970s and how you did it. So that is kind of the model that anybody working at the Fed or in government is going to be looking at is this is what we need to do. And so, in some respects, 2022 is kind of a textbook occurrence and response. So, what other things do well in that environment? Well, commodities themselves do pretty well in that environment. They're more difficult to hold. I would prefer to hold managed futures than commodities because you basically get that exposure plus other exposures. And managed futures just have a better track record overall of performance in terms of expected returns. But certain types of companies or businesses also do fine in this environment and then attract more investment in this kind of environment. And they are generally either things that deal in commodities like oil companies and those sorts of things, or companies that have the capability of passing through the increases in prices. And those do include things like property and casualty insurance companies. Unfortunately, which specific companies are going to deal well in a given stagflation environment, I don't think that's predictable because you probably also do need to know the source of why you're having stagflation and sort of where it's coming from. Is it coming from oil prices? Is it coming from some other kind of inflation? If you don't know that, then you can't say for certain which kind of company is going to help you that much. What you do know though is that value-tilted companies are going to have more of these businesses in them. And so value-tilted stocks, while they may not do extremely well, won't do extremely poorly. They may just be flat, as many of those kinds of funds were in 2022. But that is one reason you want to have a healthy allocation to value-tilted companies generally, because some of these companies I'm talking about will be in that allocation, even if you can't pick out the specific kinds in any particular environment. And if you want that exposure to property and casualty companies, but don't want to hold the individual companies, these are companies like Travelers and Chubb and Allstate, those sorts of things, you can use KBWP. It's not a horrible fund, it just has a kind of a high expense ratio of like 0.35, but it does have a correlation with the overall stock market that is really low. It's only like 0.3 or something like that. Even though overall it does tend to perform almost exactly like the SP 500 or like Berkshire Hathaway if you compare the two. Probably because Berkshire Hathaway has a whole bunch of those companies in it. So if you just have a small allocation and that's part of your value allocation, you could probably use that fund and it wouldn't drag on you too much. Your second question was do we need a better asset class ETF with more concentration to the best property and casualty performers? And the answer is I I don't think so. I think if you tried to create something that is specifically designed to deal with a certain kind of a stagflation environment, it's probably going to be overfitted to whatever environment you're talking about. So I think you're better off focused on just making sure you have a good allocation to value-tilted companies. Which can include these property and casualty insurance companies explicitly, which I do or not. The reason I don't run around telling people to do that is because I don't have a hundred years of data or something to show that that's a good idea. It just looks like a very good idea from the decades of data that we do have. For the same reason in one of your next questions, do we need a concentrated sector bet on energy and utilities? The answer is probably not. You could hold utilities just as an alternative asset class if you wanted to. They're sufficiently diversified from the overall market. But would you need one? And would you need one necessarily to be there for this kind of environment? I'm not sure that that necessarily makes sense. And I don't think I would make concentrated bets in the energy sector because it's just so erratic that when it's good, it's very, very good, and when it's bad, it's horrible. And in any event should be picked up by your value tilts in your general value funds. And you ask the question does this quadrant simply need expense adjustments, spending cuts in the discipline to weather the storm? Well, maybe, and generally, yeah, you do need to weather the storm. You don't expect even a risk parity style portfolio to have a positive performance in that environment. What you more expect is that it will outperform other kinds of portfolios. So it will be less bad, if you will, which is really what leads to higher safe withdrawal rates is being less bad in the worst environments. The other thing about that quadrant is I don't think it occurs that much. If you think about sort of the overall base rates for basic performances, we know that about 70% of the time after inflation, the stock market's going up. And so we're not really worried about those environments. And of the times the stock market is going down, usually about 15% of those or one in seven years, has to do with a recession. And that's not a stagflationary environment. So when you're thinking about stagflation, it's part of the remainder of all the other 15% of the time. So a year specifically like 2022 only occurs about once in every 40 years. You would give it a 2-3% probability of happening just like that. That doesn't mean you can't have other kinds of stagflations in other years, though. That one was a bit strange because it was induced by the government's reaction to the COVID crisis, and they just overdid it with flooding the economy with money, and then they had to correct.

Voices [38:20]

Thine own stockbrokers now lie dead by their own hand, and thou knowest that thou stockbrokers did not bear the economy. Well, here we are, my friends. You have brought the economy's vengeance upon yourselves.

Mostly Uncle Frank [38:34]

So, because you're going to see a stagflationary environment, in my mind, probably less than 15% of the time, I think it would be better just to have some things that do okay like we already do, and just grin and bear it. Because when you look at the overall performance of these kind of portfolios, a 60-40 portfolio or total stock market portfolio is basically going to be up whenever the stock market's up and down whenever the stock market's down. So it's going to be up about 70% of the time. A risk parity style portfolio tends to be up about 80% of the time. I don't think you're going to be able to do much better than that. And I think trying to do much better than that or trying to zig and zag and change your allocations is probably going to result in underperformance.

Voices [39:15]

I've officially amounted to check you squat.

Mostly Uncle Frank [39:22]

And then the final question, which was in the middle, does a margin loan backup plan help avoid selling depreciating assets? Oh, and I forgot to talk about gold, didn't I?

Voices [39:33]

I love gold.

Mostly Uncle Frank [39:37]

I don't think you can count on gold necessarily doing well during stagflation or in the middle of stagflation. You're more likely to see the kinds of odd performances that we've seen over the past few years that gold was pretty flat in 2022, but took off after that. So the timing of when it's going to perform is unpredictable. I think over long periods of time, if you had stagflation for a decade, you would expect that gold is going to do pretty well in the period overall, but may not in any particular year, depending on what else is going on.

Voices [40:11]

This is gold, Mr. Bond. I think you've made your point, Goldfinger. Thank you for the demonstration. Do you expect me to talk? No, Mr. Bond, I expect you to die.

Mostly Uncle Frank [40:24]

Going to your last question that was in the middle, does a margin loan backup plan help to avoid selling depreciating assets? And the answer is yes, it could. But here's the other thing. If you look at how these portfolios perform, there's maybe only one year in 30 when you don't have one of the assets that is going up in any given year. So the chances of you not having something that is increasing in value in a year that you can then sell from are really, really low. And that's also why you don't need a whole bunch of cash in one of these kind of portfolios. Always money in a banana stand. Because you're going to sell something that's high, and in something like 29 out of 30 years, you're going to have something that is increasing in value. So you would just sell out of that, and that kind of solves the problem. You don't need bucket sladders or flower pots full of cash or any of that nonsense. And you don't need the margin loan backup plan either. Now I can tell you, having a margin loan capability is very useful. We have that at Interactive Brokers on our brokerage account. And what it actually allows you to do is just get the convenience of saying, well, I need the money now, just take the money out, and it records a loan against your assets, and then you can look at it later and figure out what you want to sell. So you're not required to actually sell something to get the money out of it. And some people use more advanced strategies where they do continue to take more on the margin side until things go up again. And I suppose you could develop strategies like that if you wanted to. I don't think you need to, though. It was especially useful to us for the past few years because when I left the firm, there was a large pile of money there, hundreds of thousands of dollars, that I essentially couldn't access, but it was going to be paid out to me over the next six years, and we're finally getting to the end of that. So it was basically sitting in a cash pot that I couldn't invest. And so Michael, his son, and his brother together enjoyed the cathartic burning of the banana stand.

Voices [42:26]

There was money in that banana stand. Well, it's all gone down to after there's $250,000 lining the walls of the banana stand.

Mostly Uncle Frank [42:34]

So, as a consequence, what we're able to do is take margin to that extent to essentially simulate it as if we did have access to it and could invest it, and then put that into the margin account on that basis. But now that that's done, we'll only use the margin account just for cash flow purposes. And I think if you want to do that, make sure you do open an account at some place like interactive brokers. Do not use the margin accounts at places like Fidelity Schwab or Vanguard. The interest rates are just too high. It's just very inefficient unless you're just talking about a small amount of money. The rates at interactive brokers are just a little bit above usually what like the 10-year rate is, so they're more like 5% instead of like 10% at one of these other places. Anyway, I hope you enjoyed some of those insights for whatever they were worth.

Voices [43:21]

That and a nickel get your hot cup a jack squat.

Mostly Uncle Frank [43:27]

And I guess I should clarify something. You know, we've been talking about this four quadrant model for many of the past few episodes. That is not an expression of probability. There's nothing that says that you're going to spend equal time in all four of those quadrants, and in fact, you probably won't. And the reason you won't is because we have things like the Federal Reserve that do not want us to be in some of those quadrants for very long. So just bear in mind that the four quadrant model is not an expression of probability as to how much time will be spent in each quadrant. What is more useful is just knowing the Those base rates that I often cite that stock market's up 70% of the time, of the 30% of the time it's down, half of those are due to recessions, and the other 15% are due to everything else that you can think of. That's bad.

Voices [44:12]

You can't handle the trunk. I did not know that.

Mostly Uncle Frank [44:40]

So hopefully that helps. Thank you for being a loyal donor to both Fairfax Casa and the Father McKenna Center. Thank you for being a good friend. And thank you for your email.

Voices [44:50]

Don't be saucy with me, Bennetz.

Write In And Leave Reviews

Mostly Uncle Frank [44:53]

But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to Frank at RiskPartyRo.com. Then email us frank at RiskPartyRoo.com. Or you can go to the website www.riskparty.com. Put your message into the contact form, and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe and me some stars, a follow, a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio.

Voices [45:28]

Signing off The Risk Parody Radio Show is hosted by Frank Vasquez.

Mostly Queen Mary [46:18]

The content provided is for entertainment and informational purposes only, and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.